Q8SE - Horngren'S Financial And Managerial Accounting

Question

Interpreting material and labor variances

Refer to your results from Short Exercises S23­6 and S23­7.

Requirements

1. For each variance, who in Martin’s organization is most likely responsible?

2. Interpret the direct materials and direct labor variances for Martin’s management.

Step-by-Step Solution

Answer

1. Responsible department-

1. Direct Material Cost Variance- Purchase department 
2. Direct Material Effeciency variance- Production Department 
3. Direct Labour Cost variance- Human Resources department
4. Direct Labour Efficiency variance-Production Department     

2. Interpretation- 

• Direct Material Cost Variance- The company purchased high quantity at lower rate than the standard price which invariably increase operating income.
• Direct Material Effeciency variance- Efficiency of the company was low as more materials were used than planned that showing more cost and less profit.
• Direct Labour Cost variance- Labour cost is lower than expected that results in   higher operating income.
• Direct Labour Efficiency variance- Labour hours were comparatively lower than expected hours that concluded in less cost and more profit.

Step 1: Responsibility in the organization for each variance-

Purchase department is responsible for direct material cost variance.Production department is responsible for direct material effeciency variance and Direct labour efficiency variance.Human Resources department is responsible for direct labour cost variance.

Step 2: Interpretation for the company’s management-

• The $1,650 favorable direct material cost variance represents that actual direct materials cost per pound was less than standard cost per pound. This increased operating income by $1,650 of the company.
• The $650 unfavorable Direct Materials efficiency variance indicates that the actual pounds utilized was more than the total pounds allowed to manufacture 6,500 glasses. This decreased operating income by $650 of the company.
• The $9,100 favorable direct labor price variance means that the employees were paid less than budgeted. This increased operating income of the company by $9,100.
• The $11,700 favouravle direct labor efficiency variance shows that it actually took fewer direct labor hours than were budgeted to produce 6,500 glasses. This increased operating income of the company by $11,700.